Top-Line Banking Observations
At the end of the day the bank regulators, not management, determine whether a bank can dividend capital up to its bank holding company to fund quarterly dividends.
Here are some quick observations on some names in the banking sector:
- Washington Mutual (WM): Should not have been a surprise, the company gave everyone a heads up at the Lehman conference. With that said, it suggested $2.2 billion for full year provision expenses in early September. My guess is that when WaMu report numbers that figure will go even higher. Note too that WaMu chose the word "weakening" to describe the housing market.
- Barclay's (BCS): I don't buy the Bank of America (BAC) rumor. Yes BofA is limited by its deposit base to do more bank deals in the US today; however, if we see the credit market really come under pressure, I would not be surprised to see the deposit cap lifted in order to let BofA bail out a big US bank. And if I'm Ken Lewis, I have got to be salivating. Call this wild speculation, but my money is on a BofA/Nat City deal at the bottom of the cycle. The geography is perfect.
- Bear Stearns (BSC): To Jeff Macke's comment regarding Bear hiring in its mortgage servicing business - every mortgage servicer I know is hiring - in its collections area. In fact watch for mortgage servicing margins to be squeezed because of the rising cost of collections.
- Moody's (MCO): To its comment about rising 2006 vintage delinquencies. From experience, a vintage that starts bad turns out worse. And, ultimately it speaks to underwriting criteria for the time period. I would not put hope on the 2006 vintage improving relative to prior vintages. Further, it is more than likely that the 2006 vintage in other asset classes (high yield corporate debt, credit card debt etc.) will be worse than the 2005 vintage.
Finally, by my count we have hit at least $20 billion in preannounced write-offs. At 10:1 leverage this suggests that at the margin industry loan capacity has fallen by $200 billion - at a time when actual balance sheet growth has increased $300 billion. That's a $50 billion capital squeeze that will need to be addressed.
And to that point, an early reminder to investors eyeing bank stocks because of their dividend yields. At the end of the day the bank regulators, not management, determine whether a bank can dividend capital up to its bank holding company to fund quarterly dividends. Not saying it's today or tomorrow, but file this away.
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